MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has upgraded the ratings for the Metropolitan Municipality of Lima (MML) as follows:
--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB-';
--Long-term local currency IDR to 'BBB+' from 'BBB-'.
Fitch has revised MML's Rating Outlook to Stable from Positive.
KEY RATING DRIVERS
The upgrade is accordance with the same action taken by Fitch on Peru's sovereign rating in October 2013 [Long-term foreign IDR 'BBB+'/Long-term local currency IDR 'A-']. Today's upgrade also reflects MML's national importance as the economic and political capital of the country and its high and dynamic collection of municipal taxes, which supports high-margin operations. Despite an increase in debt burden, MML's strong fiscal position and high operating margins will likely still result in manageable debt metrics.
However, the ratings also factor in MML's significant investment plans, a substantial portion of which is expected to be debt funded and which will add pressure to current expenditures.
MML has the status of a special region with 43 districts within its jurisdiction. It accounts for around 45% of Peru's gross domestic product (GDP) and for around 28% of the total population of the country. An increasing tax base generated by population growth and the implementation of new fiscal policies have led to a significant increase in municipal income with property transfer taxes (alcabala) accounting for a large percentage of the income growth. Also, an important factor in increased revenue generation has been the efforts by the administration to reduce and collect tax arrears.
In addition to taxes, historically MML also collected toll road payments, but in 2013 this revenue source was transferred to new concessionaries that are responsible for the roads' maintenance and operations. This represents a significant reduction in revenues going forward; toll receipts represented around 24% of adjusted operating revenues excluding the property transfer tax collected on behalf of the districts in 2012. However, the changes will also lead to savings in operating costs.
In general, MML's budgetary performance has registered strong operating margins, averaging 46% in the period of 2009-2013. The decline in margins in 2012 and 2013 was largely attributable to reduction in revenues from toll road payments and significant increase in staff expenditure following a legal ruling. Nevertheless, MML maintains strong margins with 36% in 2013.
MML's responsibilities are largely focused on capital expenditure. Given the strong demographic growth, capital expenditure has been significant, particularly in the past fiscal years. There will be an increase in operating expenditure from the planned capital expenditure undertaken. However, Fitch's base case scenario still projects comfortable operating margins, between 25-30% in the next three years.
For the future, the investment plan includes a large number of projects such as improving and expanding the main public transport routes, parks, hills and neighborhoods, some roads, the project of the coastal zone (Costa Verde), and the large wholesale market (EMMSA), among others.
Regarding debt, MML registers PEN558 million (USD199.7 million), as of March 30, 2014. To partially fund capital expenditure, debt rose. Debt as a proportion of current revenue is estimated to increase from 22% (2012) to a maximum of 50% by end-2014. This level of debt is manageable particularly with the high operating margins. Presently all debt servicing has priority payment through formal and administrative trust deeds, which is a positive rating factor. Accordingly, Fitch would expect that any unsecured bond issuance will also have the benefit of a trust to ensure that all financial obligations rank pari passu; if this is not the case, the bond issue may have a lower rating than the issuer because of subordination.
MML has a significant number of public companies, but these do not represent a significant burden to the municipality either because they are self-financing or because of their limited budget. However, Fitch will monitor their financial situation to ensure that they maintain their financial profiles in line with levels registered in recent years.
KEY ASSUMPTIONS AND SENSITIVITIES
A positive rating action would happen if the growing trend in Lima's income is maintained, combined with controlled budgetary expenditure and favorable terms and conditions of debt. Also an upgrade of Peru's sovereign rating, accompanied by MML's solid operating performance, could trigger a positive rating action.
The current Rating Outlook is Stable, and Fitch's sensitivity analysis does not foresee any developments that would lead to a rating downgrade. However, future developments that may, individually or collectively, lead to a negative action include a significant deterioration in the budgetary performance caused by a large increase in operational expenditure and/or by a decrease in revenue. Likewise, an increase in its debt burden (long- or short-term) beyond Fitch's projections.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Tax Supported Rating Criteria' dated Aug. 14, 2012;
--'International Local and Regional Governments Rating Criteria, Outside the United States', dated April 23, 2014.
Applicable Criteria and Related Research:
Tax-Supported Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015
International Local and Regional Governments Rating Criteria - Outside the United States
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=719656
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=841097
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